4936309 Pagpapahalaga Sa Perang Kinita Pinoys Guide to Managing Finances

PAGPAPAHALAGA SA PERANG KINITA: PINOY’S GUIDE TO

MANAGING FINANCES

Eugene Gonzales

January 2007

DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

Abstract This primer and workbook is part of a series of publications aimed at promoting financial literacy among the public. After discussing some basic ideas about saving and why it is important in our daily lives, this primer offers some suggestions regarding the management of one’s personal finances, starting with goal setting and the identification of what the goals entail in terms of financial preparation. Alternative financial instruments for making savings grow are also discussed and what they imply in terms of return, safety and liquidity. Appendices describing a number of financial products relatively accessible to small savers have been included.

P A G P A P A H A L A G A S A P E R A N G K I N I T A

T O M A N A G I N G F I N A N C E S

P I N O Y ’ SG U I D E

PINOY’S GUIDE TO MANAGING FINANCES © 2007Ateneo - Economic Policy Reform and Advocacy (EPRA) Project

Produced by EPRA

Text: Eugene Gonzales ATIKHA-Balikabayani Foundation, Inc. EPRA Research Advisory and Advocacy GroupInstructional Design and Copyediting: Patricia B. ArintoBook Design and Illustrations: Aman Santos

Copyright © by EPRA SecretariatAll rights reserved.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the prior written permission of the Secretariat, except in respect of research or private study, or criticism or review.

This primer is made possible by the generous support of the American people through the United States Agencyfor International Development (USAID), under Contract of Grant No. 492-A-00-04-0024-00 Ateneo de Manila. The contents presented herein are the responsibility of EPRA and do not necessarily reflect the views of USAID or of the United States government.

For information on this publication, please contact:Rm. 205, Ateneo Center for Social Policy & Public Affairs Building, Social Development ComplexAteneo de Manila University, Loyola HeightsQuezon City 1108(632) 929-7970

Printed in the Philippines.

Preface . . . . . . . . . . . . . . . . . . . . . . . . .

Foreword . . . . . . . . . . . . . . . . . . . . . . .

A. Getting the Basics Right . . . . . . . . . . . . . . . .

1. Where does your money go? 2. What is ‘consumption’? 3. What is ‘protection? 4. What are ‘savings and investments’? 5. What are taxes? 6. How important are ‘protection’ and ‘savings and investments’ relative to ‘consumption’ expenses? 7. If your employer is already doing your savings and protection, why should you do more? 8. How do you save and protect yourself and your family?

B. Financial Planning . . . . . . . . . . . . . . . . . . .

9. What are family goals and how do you set them? 10. How do you set a time frame for each goal? 11. How will each family member contribute to the achievement of the family goals? 12. What is your complete family budget? 13. After accomplishing the family budget, what is left for you to save? C. Letting Your Money Grow . . . . . . . . . . . . . . .

14. What do you do with the money left over after meeting your family goals? 15. What instruments can you invest in directly? 16. What should you consider when making an investment? 17. How do you balance safety, liquidity and return? 18. When dealing with a bank, how do you protect your self from losing your investments? 19. What about investing your money in your own business?

Appendix A : Insurance Products and Pension Plans Appendix B : Family Budget Worksheets Appendix C : Pre-Need Plans Appendix D : Types of Risk Appendix E : Government Securities Appendix F : Types of Mutual Funds

References . . . . . . . . . . . . . . . . . . . . . . . . . .

CONTENTS4

7

11

111213131414

17

18

21

212325

3435

37

37

3839

4347

48

555761636569

71

PREFACE

Providing for the needs of oneself and family for the present as well as the future

is every responsible person’s concern. The ability to keep consumption stable

through good times and bad can often spell the difference between escaping poverty and

sinking deeper into it. Securing future consumption, which is achieved through saving,

is especially important because a good part of the future is uncertain. Thus, apart from

preparing for expenditures that are expected to be incurred in the future, one also saves

in order to have enough resources to deal with unforeseen events.

Unfortunately, while many Filipino families are convinced about the importance of

saving and may actually have the capacity to save, information about where to keep

their savings, in which form it is advisable to save, and what returns as well as risks are

associated with the various alternatives is rarely available in a medium that is easy to

understand for the average Filipino. One result is that many savers content themselves

with the low (and, with inflation, negative) rates of return on regular bank savings

deposits. Alternatively, they shy away from the formal financial system altogether. It

is also not uncommon to hear stories of families that have attained some measure of

financial self-sufficiency backsliding into poverty because of unwise spending decisions

while “the going was good”, or after having lost their entire savings to some financial scam

promising unusually high returns.

This primer is a modest contribution to the effort to raise the level of financial literacy

among our population. It grows out of the conviction that without savers, there will be no

resources available for the investments needed for economic growth. Indeed, no lending

and borrowing can take place amongst individuals, households and firms, whether for

business or for consumption, without saving.

Unfortunately, savers, particularly small savers, are typically less the focus of public

attention compared to borrowers who have been the target of many special programs,

both government and private. Microfinance, for example, is more easily associated with

micro-credit in the public consciousness, even if the provision of deposit taking services

for small savers is an equally important function of a microfinance institution. In fact,

such institution cannot hope to become viable and permanent without ever mobilizing

deposits from the saving public.

The fact is that more people save than is readily acknowledged partly because saving

takes various forms, some of which are not easily captured in survey data. And because

not everyone borrows (whether through banks or from informal sources) while the act

of saving is taking place even if people are not conscious about it, savers outnumber

borrowers. This means that measures to improve the returns on saving for small savers

may have a far better chance of improving more lives than the best lending programs.

But this cannot come about if savers are not adequately informed about the alternatives

available to them, and if their hard earned savings are not reasonably protected from

unwarranted risk.

This primer is about the importance of saving as it is about how families who have

savings can make the most out of their savings. Its inspiration derives from earlier

attempts by some non-governmental organizations (NGOs) to assist overseas Filipino

workers (OFWs) and their families maximize the benefits from their hard earned

incomes by identifying productive and profitable uses for these. While it is typical for

families of OFWs to want to use the income remittances received to put up their own

small businesses, operating a small enterprise requires certain entrepreneurial skills not

5PREFACE

MANAGING YOUR HARD EARNED MONEY6

possessed by everyone. For those who may not have the appropriate skills to operate their

own business, investing their savings in financial instruments is one alternative toward

securing their future consumption. This primer deals mainly with the latter option. And

the intended readership is certainly not limited to OFWs and their families.

After discussing some basic ideas about saving and why it is important in our daily

lives, this primer offers some suggestions regarding the management of one’s personal

finances, starting with goal setting and the identification of what the goals entail in terms

of financial preparation. Alternative financial instruments for making savings grow are

also discussed and what they imply in terms of return, safety and liquidity. Appendices

describing a number of financial products currently on offer in the financial market have

been included. This is not meant to be an exhaustive list of such products, although these

are the ones that seem to be relatively accessible to small savers.

This primer, it is hoped, will find use in the various efforts by government, non-

government and grassroots organizations to improve the level of financial literacy of

Filipinos. It has been written and developed in a way that will give trainers the flexibility

to adopt it, either fully or in part, according to the situation and the particular interest of

their audience.

Knowledge is power.

FOREWORD

Are Filipinos poor savers? Statistics suggest that Filipinos save much less than their

Southeast Asian neighbors. According to data from the Asian Development Bank,

the ratio of our gross domestic savings (GDS) to gross domestic product (GDP)—the

latter being a measure of national income—was 18.8% in 2002, against Singapore’s 44.8%,

Malaysia’s 41.9%, Thailand’s 31.1%, and even Indonesia’s 21.1%. Looking at these figures,

one is tempted to conclude that a country’s level of development is broadly correlated

with—and probably determined by—its ability to save. Or could it be the other way

around, i.e. the level of development determines the saving rate? The fact that Indonesia

has a lower per capita income and yet has a higher saving rate than the Philippines seems

to weaken this argument.

Saving is measured as what gets left after deducting all expenditures and debt payments

from disposable income (i.e. income after taxes). There are four general groups of savers

in an economy: households (private individuals) and unincorporated enterprises, private

corporations, government corporations, and the government itself. Persistently large

budget deficits have made government a non-contributor to national savings. And our

private saving is low compared to the rest of the region.

Why do Filipinos save so little in comparison to their Southeast Asian neighbors? The

standard answer has tended to be, “because most Filipinos are too poor to save.” There

are claims that Filipinos who do save (i.e. those with higher incomes) have saving rates

that exceed that of, say, the Singaporeans. But for the majority of Filipino households who

earn barely enough to support their needs, savings can be expected to be minimal, and

thus the overall saving rate is low.

Still, others who have actually studied and worked with the poor argue that the poor do

save. Researchers have documented how poor families especially in the rural areas tend

to stock up on specific commodities—not necessarily durables like jewelry or appliances,

but storable groceries for example—and then sell these off in times of need for cash.

That is saving. It is not uncommon for poor rural households to keep a pig tied up in the

backyard, fattening it with whatever kitchen refuse can be collected from neighbors and

an occasional kilo or two of livestock feed. The intention is to cash it in at a time of need,

as at school opening time. That is saving. And then there are the paluwagan schemes one

seems to find in every squatter neighborhood, especially among the women. Again, that

is saving.

Who says the common people don’t save? They do, except that their savings never find

their way into the formal financial system, or the official statistics on saving. Chances

are that our low saving rate as officially reported is substantially understated, given these

various forms of saving actually undertaken by the poor, which, put together, would

amount to substantial sums. What more if we can channel the daily amount many of

them stake in the illegal numbers game jueteng into savings schemes instead?

Turning people’s savings into investments by enterprises requires intermediaries or

mechanisms to link the savers to the investors. In the Philippines, banks still account for

about 82% of financial resources in the system. It is estimated that in normal times more

than half of domestic savings probably go through the banks. But banks need not be the


only link. In other countries, enterprises have come to depend less and less on bank loans

for their financing requirements, as other financial market mechanisms (equity markets,

commercial paper, mutual funds, pension funds, etc.) have emerged as preferred saving

instruments to low-interest yielding bank deposits. There are active efforts underway in

the Philippines to correct policy distortions that have put these other mechanisms at a

disadvantage vis-à-vis the banks in linking savers to investors.

This manual is motivated by this concern for how to channel the substantial savings

coming from common citizens, including from the lower income groups, into the

financial pool. More important, it is hoped that through this manual, common Filipinos

will be able to substantially improve their financial welfare merely by saving wisely, by

being better-informed on how to do so. In this way, we may find that the apparently low

saving rate of Filipinos is more of a statistical illusion than an actual fact.

Cielito F. Habito

Ateneo de Manila UniversityLoyola Heights, Quezon City

9FOREWORD

1. Where does your money go?

Tick your answers from the choices given below: Your bank account

Support for your parent/s or elderly relatives/guardians

Your children’s education

Household expenses

Insurance premiums

All of the above

Others. Please specify.

A. GETTING THE BASICS RIGHT

The family of an overseas Filipino worker (OFW) in Mabini, Batangas spends on the following every month:

Source: Añonuevo, 2002, p. 130

What about you and your family? What do you spend your monthly income on?

Table 1-1 | Monthly Expenses of an OFW from Mabini, Batangas

Others - 0.84%

Help to relatives - 2.84%

Personal needs - 2.92%

Leisure - 3.60%

Telephone bills - 5.20%

Health care - 6.12%

Debt payments - 6.49%

Furniture / Gadgets - 9.46%

Education - 25.42%

Food - 35.80%

Item

s

Percentage of monthly income0 5 10 15 20 25 30 35 40

What you spend your income on can be classified as follows: • Consumption

• Protection • Savings

• Taxes

2. What is ‘consumption’?

Consumption items are items that you spend on in order to survive and advance in your work. Except for education and information, once these items are used up, they are lost forever. That is why they are called ‘consumption’ items.

Using the definition above, tick the items below that may be considered consump-tion items:

Food Entertainment, such as a movie

Clothing Rent for the house you live in

Taxi and jeepney fare Cigarettes

Alcoholic drinks Jewelry

All of the items listed are consumption items. Some items, such as food, clothing, shelter, transportation, education, information and leisure, are basic needs. Others, like jewelry, luxury items, cigarettes, alcohol and the like, are non-basic needs.

Ask yourself:• How much of my income is spent on consumption items?• How many of the consumption items that I spend on are basic needs? How many are non-basic needs?


3. What is ‘protection’?

Some items that you spend on serve the purpose of protecting you and your family from the negative impact of unexpected events, such as illness, an accident or death. These are called ‘protection’ items.

The following are examples of payments for protection. Which of them do you have? Tick your answers. Medical/Health Insurance (for example, PhilHealth) Social Security System (SSS) or Government Service Insurance System (GSIS) contributions Life, Accident and/or Disability Insurance Vehicle and Property Insurance Memorial Plan 4. What are ‘savings’?

Savings refer to that part of your disposable income (that is, your income after tax, or your take-home pay) that is not consumed. Some of these may be used to purchase interest-earning financial assets or directly invested in business. In either case, there is a return that accrues to you, the saver/investor.

Money that you save and invest accumulates and grows for your future use. Examples of savings and investments are deposits into— • A Savings Account • A Time Deposit • Long-Term Funds (for example, trust, pension and investment funds)

• Real Estate (a house and a piece of land can be sold at a higher price

in the future)

Ask yourself:• How much of my income am I saving? • Am I saving enough for myself and my family’s future needs?

13GETTING THE BASICS RIGHT

5. What are taxes?

Taxes are payments you make to the government so that public goods and servic-es can be provided to you and to all other citizens of the country. Taxes constitute national savings. The amount of taxes you pay is based on your income, the value of your real property, and the value of goods and services that you purchase. Overseas Filipino Workers (OFWs) are exempt from income tax but not from other taxes. Persons who are employed within the Philippines pay all local taxes.

6. How important are ‘protection’ and ‘savings’ relative to ‘consumption’ expenses?

You cannot avoid spending on basic needs. But it is equally important for you to spend part of your income on protection and savings.

Why save and invest? You are your greatest income gen-erating asset. You and your fam-ily depend on you to earn a living and ensure your collective survival. Therefore you should protect yourself not only by keeping yourself fit and healthy, but also by insuring yourself against possible accidents and dis-abilities. However, no matter how well you care for yourself and despite insur-ance, you will not always be young, energetic and strong enough to earn a living. You need to save and invest part of your income now so that you will have something to live on when you retire.

It is very important to save for the future and to acquire protec-tion against untoward events that could deprive you and your family of a steady income. For example, you should have money set aside for emergency situations and/or sickness. If you do not have this, you will end up having to either forego getting treat-ment or forego spending on basic necessities such as food while you spend for treatment.

This is clearly not a choice where one option is better than the other. This is why the lack of sav-ings is often used as an indicator of poverty. Lack of savings does


Obstacles to Saving

Despite the value of saving, few people are able to save enough to finance their future needs and achieve financial independence or freedom from poverty and want. This is true of many OFWs. According to Colayco (2004), “Many OFWs come back with hardly enough money to retire com-fortably after their many years of hardship. Worse, they end up with just the same or even less than what they had when they first left. Many have perhaps been mistreated and many more have been ill advised particularly with regard to the money they have earned.”

A case in point: After working for 15 years as a domestic helper in Rome, 55-year-old Flor was able to save Php50,000. But the entire amount was used up after only three months back in the Philippines. She says: “Umuwi ako dahil kay Tatay (her husband) at dahil pagod na rin ako. Pero zero bal-ance kami ni Tatay at ayaw kong umasa sa mga anak ko.” (Dizon-Añonuevo, 2002, p. 139)

Aside from the seemingly endless and sometimes unreasonable demands for financial support from family members, what else makes it difficult for people to save?

not give you any choice but to live with a bad situation. It also puts all of your years of hard work to waste as all of your income goes into expenses that do not improve your and your family’s quality of life.


Colayco enumerates the following “obstacles to financial freedom” that you must recognize and then fight against.

• Procrastination – delaying savings or putting saving off for another time instead of starting immediately

• Poor spending habits – includes spending on unnecessary items or failing to postpone purchases when possible; also includes impulse buying (buying something on a whim, without thinking about whether you really need it) and buying something because it is the trend (uso kasi)

• Lack of independence/Being overly dependent on others – thinking that you can rely on family or relatives to bail you out of financial trouble in the future

• Lack of financial literacy – spending on liabilities (items that cost you more in the long term) or items that decrease in value over time, instead of assets (items that will grow in value); not knowing how to make your money grow and work for you (instead of you working for your money)

Sources: Colayco, Francisco. 2004. Wealth Within Your Reach. Pera Mo, Palaguin Mo! Dizon-Añonuevo, Mai. 2002. Migrant Returnees, Return Migration and Reintegration. In Dizon-Añonuevo, Estrella and Añonuevo, Augustus T. (eds.) Coming Home: Women, Migration & Reintegration.

Salaried employees have “automatic” protection and savings as these items are deducted from their salaries by their employer and remitted to the appropriate government agencies for social security (SSS/GSIS), health (PhilHealth), housing (PAGIBIG), and other benefits. The situation is different for OFWs whose employers do not deduct for nor provide savings and protection instruments. Insurance companies can help you save and provide protection for yourself and your family. The Philippine Insurance Commission regulates the operations of insurance companies in the Philippines. Visit the Philippine Insurance Commission’s website (www.insurance.gov.ph) to see the complete list of licensed and the best performing insurance companies in the country. Do not buy from companies that are not included in the list of licensed insurance companies.


Company Assets

1. Philippine American Life & Gen. Ins. Co., Inc. 92,065,101,2652. Sun Life of Canada (Phils.) Inc. 53,041,986,2123. Insular Life Assurance Co., Ltd. 43,007,382,2944. Manufacturers Life Insurance Co., Inc. 15,357,314,3285. Phil. AXA Life Insurance Corp. 13,923,412,3856. Ayala Life Assurance, Inc. 10,538,327,8627. Pru Life Insurance Corp. of UK 5,543,914,3208. Great Pacific Life Assurance Corp. 5,491,931,7679. United Coconut Planters Life Assurance Corp. 4,930,812,43010. Manufacturers Life Insurance Co., Inc. The (Branch) 3,561,807,313

Table 1-2 | Top 10 Insurance Companies Ranked by Reported Assets as of 31 December 2005, in pesos

7. If your employer is already doing your savings and protection, why should you do more?

The compulsory deductions from your salary are not enough for your protection needs. Benefits from the Social Security System (SSS), Government Service In-surance System (GSIS), and PhilHealth are limited. You will need to supplement these benefits with your own savings and/or insurance if you want to be able to cover all medical expenses, acquire a house of your own, or enjoy a comfortable retirement.

How Much Do You Need for Retirement?SSS members who retire after age 60 and who have paid 120 monthly contributions prior to retirement will receive a life-time monthly pension equivalent to whichever is higher of the following: 1. The sum of P300 plus 20% of the average monthly salary credit plus 2% of the average monthly salary credit for each credited year of service in excess of 10 years; or 2. 40% of the average monthly salary credit; or 3. P1,200, provided that the monthly pension is paid for not less than 60 monthsIs this enough? How much do you spend now to maintain your desired standard of living? Are you ready to lower your standard of living when you retire? What will be the real value of your monthly pension from SSS by the time you retire?Source: Philippine Social Security System Website. Available online at http://www.sss.gov.ph/


8. How do you save and protect yourself and your family?

The first thing to remember is that your family should not depend on only one family member to earn an income, even if he/she is working abroad and earn-ing in foreign currency. Can you think why? Tick your answers from the choices given below. Family expenses do not decrease just because one member of the family is earning in a foreign currency. The OFW may not earn enough to cover all of the family’s expenses. Even if the OFW’s income can cover all of the family’s expenses, it may not be enough to allow the family to save and pay for protection, such as health insurance. The other members of the family develop the mentality of dependents and do not develop self-reliance, autonomy, concern for others, and the values of cooperation and collaboration. Relationships become strained and are sometimes destroyed. For example, instead of parents supporting children, a child supports his/her parents. Or family members compete for the support of the OFW, causing severe conflicts. Relying solely on the OFW’s income gives the family a false sense of security and makes them especially vulnerable to the possibility of a loss of income, such as illness or an accident.

Second, you and your family must PLAN and BUDGET your FAMILY INCOME. In the same way that all family members who can earn an income should contribute to meeting the family’s financial needs, it is important for the whole family to jointly plan how the family income will be spent. Remember these steps in family financial planning: 1. Set family goals together. 2. Set a time frame for achieving each family goal. 3. Discuss and determine how each member will contribute to achieving the family goals. 4. Remind everyone of their commitment from time to time. 5. Monitor whether the family is moving towards its goals or not.


The Problem of Overdependence

Expecting the OFW to shoulder all of the family’s financial obligations puts a great deal of psychological and financial pressure on him/her.

“Mukhang habang buhay na akong magkukudkod ng inodoro! Walang tigil ang hingi sa atin! Akala mo pinupulot lang ang pera dito!” exclaims Aling Tita, a 55-year-old domestic helper who has been working in Rome for al-most 15 years. Indeed, many OFWs are forced to take on several part-time jobs on top of their regular contract (Filipina domestic helpers abroad call this “aerobics” or “kudkod”), in violation of the laws in their host countries, just to be able to keep up with increasing financial demands of their families in the Philippines. (Valerio, 2002, p. 49)

Because they are often the sole family breadwinners, OFWs end up working abroad more years than they had originally planned for. Despite their rela-tively high incomes, they are unable to save enough money to come home and find alternative means of livelihood.

Tita has worked abroad for 15 years. She earns the equivalent of Php40,000 a month. But she has very little in savings. Why? Tita spends about Php15,000 for her needs in Italy, and sends home around Php20,000 a month to pay for her family’s food, school expenses, transportation, water and electric bills. Instead of going into her savings, the Php 5,000 left over often gets sent to relatives who ask her for financial assistance occasionally at first and then eventually on a regular basis. (Añonuevo, 2002, pp.129-130)

Sources: Añonuevo, Augustus T. 2002. Reintegration, An Elusive Dream. In Dizon-Añonuevo, Estrella and Añonuevo, Augustus T. (eds.) Coming Home: Women, Migration & Reintegration. Valerio, Rosanna Luz F. 2002. Pag-ahon sa Kumunoy ng Utang: The Debt-ridden Life of Migrant Women. In Dizon- Añonuevo, Estrella and Añonuevo, Augustus T. (eds.) Coming Home: Women, Migration & Reintegration.


9. What are family goals and how do you set them?

The following are examples of family goals:

a) Education – This usually refers to the education of your children, or your siblings if you are unmarried and do not have children of your own. But you should also not forget your own education and training if you want to advance in your career or business. Education can be through formal schooling or through non-formal training programs and courses. Plan for both as one form may not be enough.

b) Housing – Having a home of your own is a necessity. It is also an important investment decision. Depending on the location, design, and developer/builder of your home, it can either increase or decrease in value through the years.

c) Health – Health is wealth, as the saying goes. Certainly, ill health can make you poor as it prevents you from earning a living. Fortunately, people are becom-ing more health-conscious. People want to eat the right food, exercise, and live a healthy lifestyle. But being health-conscious is not enough. You must also have HEALTH INSURANCE. Without health insurance, you can end up spending all of your savings, or worse, going into debt, when someone in the family gets sick or has to be hospitalized. SSS/GSIS and PhilHealth benefits cover only a very small portion of health insurance needs.

d) Retirement – Very few Filipinos plan for their retirement. Many assume that their children will take care of them when they retire. But while this is part of the value that Filipinos place on family, financial dependence of parents on their children can cause conflicts within the family, between siblings and with in-laws. There are cases where the retired or unemployed mother or father is “jealous”

B. FINANCIAL PLANNING

of their child’s dependents, such as his/her spouse and children. There are also cases of spouses resenting their parents-in-law for being a “drain” on the family income.

In addition, it is difficult and stressful for one person to provide for the needs of so many dependents. It is important for you to set aside money from the income you are earning now for your own retirement, so that you do not become a finan-cial burden on your loved ones.

e) Protection against negative events - The following are events which you don’t want to happen but which are often beyond your control. The only way you can protect yourself against the negative effects of these events is by preparing for them.

• Unemployment – Your contributions to SSS or GSIS enable you to receive benefits when you become unemployed. However, these are not enough to compensate for the loss of your salary. And they last only for a maximum of 6 months. You need some SAVINGS to tide you over your period of unemployment.

• Sickness, Accident, and Disability – The best way to prepare for these negative events is to keep yourself healthy and accident-free. You should also keep your house, car, and other properties safe from fire and other disasters. But there is no substitute for INSURANCE. Without accident/ disability insurance, you could end up spending all of your income and even go into debt when you get sick, have an accident, or lose your properties. • Death – As the saying goes, “In life, only two things are certain—death and taxes.” So we might as well prepare for both. You can prepare for death by obtaining life insurance. Without life insurance, your family is left with nothing when you die. Worse, they could end up going into debt just to pay for your funeral expenses.


Family WorkshopsThere are organizations that can help you and your family set goals together. An organization that facilitates 1- to 2-hour family visioning and goal-setting exercises for OFWs and their families is ATIKHA (www.atikha.org).

The family workshops need not be complicated. They can be fun while helping family members accomplish the important task of planning their goals together. Family members should be able to voice out their goals and hopes for the future and at the same time realize that each one has an important role in attaining these goals.

The desired outcome is that each family member commits himself/herself to contribute to the achievement of these goals. The contribution need not be financial. For children, it may be a commitment to study hard and live a simple, healthy lifestyle. For parents, siblings, and spouses, it may be to continue or look for employment, save money, keep them-selves healthy, or regularly pay their insurance bills.

10. How do you set a time frame for each goal?

Start by answering the following questions.

a) Education: When will all the children/siblings finish high school or college?

b) Housing: When can you buy your own home or at least make the down payment for a new home?

23FINANCIAL PLANNING

Health Is Wealth

Health and protection are very much interrelated. If you are not healthy and you do not take care of yourself, you can get sick, meet an accident, get disabled, or even die.

To meet your health and protection goals: • Get the necessary vaccinations for all members of the family. • Eat the right food in the right amounts. • Exercise. • Get regular physical examinations. • Get health, accident, property, and life insurance.

c) Retirement: At what age do you plan to retire?

d) Health and Protection: • Have all the children received the required vaccinations (for example, against DPT, polio, measles, BCG, hepatitis B)?

YES NO

• Do the adults in the family have health plans?

YES NO


EDUCATIONGOAL

• Put the names of the children/siblings who plan to finish college in Column A.• How much does each year of education/training cost (tuition, books, uniforms, allowances, etc.)? Put in Column D.• Add the entries in D to get the Total Cost of Education, D1.• How much will the other family members contribute to your children’s/siblings’ education? Put these in Column E. Add to get the total E1.• How much will you contribute to your children’s/siblings’ education? Calculate this and put your answer in column F. Add to get the totals D1, E1 and F1.• Divide D1, E1 and F1 by 12 to get the monthly costs, D2, E2 and F2.• Below are sample computations only. You and your family should know the actual costs.

A. Name D. Cost of Education: Tuition, Books, Clothing and Allowance

E. Family Contribution F. Your Contribution

1. Anna 80,000 80,000

2. Edgar 60,000 60,000

3.

4.

You 25,000 25,000

Total Cost of Education

D1 = 140,000 E1 = 80,000 F1 = 85,000

Monthly Costs D2 = D1/12 = 11,666 E2 = E1/12 = 6,666 F2 = F1/12 = 7,083

11. How will each family member contribute to the achievement of the family goals?

You need to make the goals a little more specific by asking the following ques-tions for EACH GOAL: • Who? • What? • How many? • What /How much does it take? • How will each member of the family (including you) contribute?

Fill in each of the tables that follow. The same tables are reproduced in Appendix B as worksheets. You can copy the tables to a bigger sheet of paper if the space here is not enough. Let every member contribute information especially about costs, prices, expenses, etc. This will be a good learning experience for everyone. Some of you may be surprised at how cheap, or how costly, some items are!

Table 2-1 | Education Goal


Some people prefer to invest in pre-need education plans. These are contracts that provide for the payment of an agreed upon amount of money for your child’s college education, in exchange for your payment of a specified amount years be-fore your child goes to college. Recently, several pre-need education plans became the subject of controversy when they failed to deliver the promised amounts of educational coverage as a result of their failure to accurately project the actual costs of tuition.

It is advisable to buy pre-need plans only from the best performing insurance companies. Visit www.insurance.gov.ph to see a list of the top insurance compa-nies and ask an agent to explain their education plans to you. (See Appendix C for a more detailed discussion of pre-need plans.) If you decide to buy an education plan, include the total annual payments for these under column D. You can also choose to invest the money you wish to allot for your child’s future education in another investment instrument, instead of buying a pre-need education plan. Dif-ferent types of investments instruments are discussed in Part C of this primer.

From filling in Table 2-1, you and your family should realize the following: • Given the high costs today, it is impossible to depend on one family member to support everyone else’s education. Everyone must do his/her share to pay for this expense. Working family members should never quit work just because there is an OFW in the family or just because one family member has a relatively high-paying local job. • Having more children means higher educational expenses. This is one reason why planning the size of your family is important. • Those who are still going to school should realize how much their parents/siblings are sacrificing to see them through school. Given that they are not earning an income yet, their main contribution to this family goal is to save money, study hard, and adopt a simple and healthy lifestyle.

Remember:The best way to finance your children’s education is to project the cost of your children’s education as early as possible, and then to save and invest part of your income to cover this cost.


HOUSING GOAL

• If your family plans to buy a house and lot, put the amounts for down payment and monthly installments (total for 1 year) in column G.• If the family is renting a house, put the 1-year total also in column G.• How much will the other family members contribute to the down payment and to the installments? Put the answers in Column H. • How much will you contribute? Put the answers in Column I. Add to get the totals G1, H1, and I1. Divide these by 12 to get the monthly costs, G2, H2, and I2.• Below are sample computations only. You and your family should know the actual costs.

G. Annual Payments for House and Lot

H. Family Contribution I. Your Contribution

Down Payment 100,000 100,000

Monthly Installments for 1 year

120,000 80,000 40,000

Rent per Year

Total G1 = 220,000 H1 = 180,000 I1 = 40,000

Monthly G2 = G1/12 = 18,333 H2 = H1/12 = 15,000 I2 = I1/12 = 3,333

Renting a house or apartment all the time is expensive in the long run because you “lose” all your payments to whoever owns the house. When you buy and make monthly installments for a house, you don’t lose these payments because you become the owner of the house. You are effectively paying yourself. Later, you can sell your house or take out a bank loan using the house as collateral. Are all employable/employed persons in the family members of PAGIBIG or SSS? If not, visit http://www.pagibigfund.gov.ph/mt_faq.htm to find out how to become a member.

If you are an OFW and cannot afford to buy a house and lot now, at least make it your top priority to become a member of the PAGIBIG Overseas Program. Visit or download http://www.pagibigfund.gov.ph/sp_h2mpl_pop.pdf.

If you are newly employed locally, ask your employer to make you a member of PAGIBIG and make sure your contributions are actually remitted to the housing fund.


Table 2-2 | Housing Goal

When buying real property:

• If your family does not yet have an idea of the location, area, total cost, down payment, and monthly installments for the house and lot, do a canvass and get these information for several houses from which your family can choose your desired home. Take your time. Do not force yourselves to make a decision that you may regret later. Remember that you make this kind of decision probably only once in your lifetime. Make sure you are happy with it.

• Make sure that the property you want to buy is properly titled and has no claimants (“clean title”) other than the owner. You can find this out from the Register of Deeds of the town or city where the property is located.

• If the property is newly developed, find out if the developer is properly accredited with the Housing and Land Use Regulatory Board (HLURB) and has a license to sell the property. Visit http://www.hlurb.gov.ph/ar ticle/archive/113/ to see the “Master List of Developers and Projects in the Expanded National Capital Region”. The addresses of HLURB Regional Offices are at http://www.hlurb.gov.ph/article/archive/71/ .

• Get a document in exchange for every payment you make, whether it is an Official Receipt, a Contract to Buy and Sell, a Deed of Absolute Sale, or the original title itself. The more of these documents you can get, the better.

• After doing the above and you find out that you can easily afford to make a “Cash Payment” (that is, give the property’s total price in one payment), ask for a big discount (10% or higher) because you are doing the owner a big favor.

To get more tips, visit http://www.eyp.ph/complete.jsp?page=660&content=2003/0526_realestate.html#1


HEALTH PROTECTION

GOAL

• Have the children received the required vaccination (against DPT, polio, measles, BCG, and hepatitis B)? If not, go to the nearest government health center or consult a pediatrician in a private hospital. Put the cost of vaccinations, if any, in Column J.• Do the adults in the family (including you) get a regular medical check-up? If not, they should get it.• Do the adults (including you) have a health care plan? If not, they should get one. A health plan usually pays for a regular medical check-up. Put the annual cost of health plans in the space allotted in Column J.• How much will the other family members contribute? Put their contribution to vaccinations and health plans under column K.• How much will you contribute? Put the amounts for vaccinations and health plans under column L. Add to get the totals J1, K1, and L1. Divide these by 12 to get the monthly costs, J2, K2, and L2.• Below are sample computations only. You and your family should know the actual costs.

J. Payments/ Year K. Family Contribution L. Your Contribution

Vaccination 5,000 5,000

Health Plans 15,000 15,000

Total J1 = 20,000 K1 = 5,000 L1 = 15,000

Monthly J2 = J1/12 = 1,666 K2 = K1/12 = 416 L2 = L1/12 = 1,250

Keep in mind that:

• If you go early enough to a government health center, your children can get all of the required vaccinations for FREE.

• Using insurance packages in the market today as reference, it costs only a (US) dollar a day to buy 1-year health plans for three adults! Get a health plan for the adults in your family (including yourself, if you don’t have one) so you won’t have to worry too much about expenses when someone in the family gets sick. Again, it is best to buy health plans offered by the best performing insurance companies in the country. Visit www.insurance.gov.ph.

• If you can get a health plan that covers the children too, then so much the better.


Table 2-3 | Health Protection Goal

INSURANCE PROTECTION

GOAL

• Do you (and your spouse, if you are married) have life/accident/disability insurance? A memorial plan? Put the annual cost of insurance and memorial plans in the space allotted in Column M.• How much will your spouse contribute? Put this in Column N.• How much will you contribute? Put this in Column O. Add to get the totals M1, N1, and O1. Divide these by 12 to get the monthly costs, M2, N2, and O2.

M. Payments/ Year N. Spouse Contribution O. Your Contribution

Life/Accident/Disability Insurance

Memorial Plan

Total M1 = N1 = O1 =

Monthly M2 = M1/12 = N2 = N1/12 = O2 = O1/12 =

Ask yourself:• If I die today, how much money should I leave with my immediate family (beneficiaries) in order for them to still live comfortably?• This is the basic question to ask when choosing your life insurance plan. Call this amount Z.

• Consult an insurance agent and ask, “How much premium should I pay for so many months and years in order to be able to leave Z amount of money to my beneficiaries?”

• If you can afford the premium, get the insurance plan that will pay out Z amount of money to your family. If you cannot afford the premium, ask your agent for insurance plans that you can afford. Remember that if you miss even a single premium payment you may forfeit your previous payments and your insurance! So make sure you choose a plan that you can afford. • You cannot be expected by other family members to pay for their life insurance. By paying for your life/accident/disability insurance, you


Table 2-4 | Insurance Protection Goal

RETIREMENT GOAL

• Do you (and your spouse, if you are married) have a retirement/pension fund or plan? Put the annual cost of payments for your and your spouse’s retirement/pension funds in the space allotted in Column P.• How much will your spouse contribute? Put this in Column Q.• How much will you contribute? Put this in Column R. Add to get the totals P1, Q1, and R1. Divide these by 12 to get the monthly costs, P2, Q2, and R2.

P. Payments/ Year Q. Spouse Contribution R. Your Contribution

Pension

Total P1 = Q1 = R1 =

Monthly P2 = P1/12 = Q2 = Q1/12 = R2 = R1/12 =

A pension fund is simply a pool of money that you build through regular sav-ings. The company you buy it from invests it so that it can grow substantially. It is classified as a pre-need product and by itself is not considered insurance. Again, it is advisable to buy retirement/pension plans only from the best-performing insurance companies.

are making sure they receive adequate monetary support when you pass away. However, you and your spouse can discuss how the two of you can share in insurance payments to make sure that your children will be properly supported if one or the two of you pass away.

• To set the amount of insurance for your property, ask yourself, “How much should the insurance be so that I can rebuild my house (in case of fire and other property damage) to at least the same state it was before?” Then, as above, find out how much you can actually afford.

Ask yourself:• How much money should I receive when I retire so that my family and I can still live comfortably?• Some financial advisers suggest that you can still live comfortably if you receive 70-80% of your salary before retirement. Calculate this. Call this amount Z1.


Table 2-5 | Retirement Goal

• Consult an insurance agent and ask, “How much premium should I pay for so many months and years so that I can receive Z1 amount of money when I retire?”

• If you can afford the premium, get the retirement/pension plan that will pay out Z1 amount of money to you when you retire. If you cannot afford the premium, ask your agent for pension plans that you can af ford. Again, make sure you choose a plan you can afford.

• For example, you are now 21 years old and you want to receive a lump sum of more than PhP 2 million when you retire at 60 years old. There are pension plans offered by insurance companies that will give you a lump sum of PhP 2.2 million upon retirement for which you have to pay only PhP 1,442 per month for 5 years. This means you pay only a total of PhP 86,550 during those 5 years but you get more than PhP 2 million when you reach 60.

• Let us say you want to use your money now for other things and you start paying your pension plan only when you are 31 years old. Using the same computation, you will get only around PhP 800,000 when you retire at 60. So it is better to start building your pension fund when you are still young. If you still have extra money after paying off your pension plan in 5 years, then you can buy another plan to give you more money when you retire. • Encourage your spouse (and your parents) to save for his/her retirement even if he/she is earning less than you are. You can do this by “matching” his/share with a contribution from you. For example, if he/she contributes PhP 1,000/month to his/her pension, “match” it with PhP 500 or PhP 1,000 aside from paying for your own pension. That is if you can afford it, of course. Your siblings should be respon sible for their own retirement.


FINALLY, compute for consumption expenses.

CONSUMPTION Family’s Monthly Expenses

Family Contribution Your Contribution Your Monthly Expenses

Food

Utilities

Transportation

Clothing

Leisure

Total S = T = U = V =

Remember the following:

• For Clothing Expenses, it is clearly not necessary to buy new clothes every month. What you can do to get the monthly figure is calculate expenses for a family member per year, get the total for all family members, and then divide the total by 12. All other expenses can be done on a monthly basis.

• Include cell phone loads under the cost of Utilities.

• Leisure is an important item to include because doing so will set a limit or budget to it. If you don’t put it there the tendency could be to splurge because no limits were set. The other extreme is not to spend any time for leisure, which may put unnecessary stress on family relations.

You MUST:1. Encourage everyone to participate in listing, comput- ing, and validating your list of expenses. You will have a lively discussion for sure.2. Make a separate list of your own expenses, especially if you are an OFW. This could help other family members realize how much you are sacrificing by contributing to their expenses while spending very little for your own.


Table 2-6 | Total Consumption

12. What is your complete Family Budget?

Fill in the Family Budget table below with the amounts you calculated from the previous tables.

Negotiate among yourselves the realistic amounts and contributions each mem-ber can make. You may have to go back to the previous tables to recalculate and renegotiate.

Remember: Each one should make a contribution no matter how small. For children, this may mean saving on expenses and putting their money in the bank. For employable adults, this means looking for employment or maintaining their present employment even if they are receiving only a modest salary. It also means diligently paying for their insurance and pension plans. After you have negotiated your respective contributions, you can compute the totals W, X, and Y.

Goal Amount Family Contribution Your ContributionEducation D2 E2 F2

Housing G2 H2 I2

Health J2 K2 L2

Insurance M2 N2 (spouse) O2

Retirement P2 Q2 (spouse/parents) R2

Consumption S2 T2 U2

Total W = X = Y =

Now that you have filled in this final table, you have finished most of the Plan-ning and Budgeting Process. Congratulations!

Now, do the following:

1. Get each family member’s commitment to the Family Budget by keeping expenses below or equal to W and by maintaining the


Table 2-7 | The Family Budget

respective contributions, X and Y. Make sure everyone has a copy of the Family Budget to remind each one of their commitment;

2. Review the Family Budget and actual costs and contributions twice or thrice a year to see if it is being met or whether it needs to be revised. You may have to assign a specific member of the family to lead this important task.

Don’t worry if you cannot finish the Family Budget quickly. You really need plenty of information (tuition fees, insurance, housing payments, etc.) to fill it up. Just make sure you do fill it up somehow and get everyone’s commitment to live up to it!

13. After accomplishing the Family Budget, what is left for you to save?

You have already done your saving by “paying” for your Education, Housing, Health, Insurance, and Retirement goals before your consumption needs. This is “saving before you spend” and “paying yourself first.” Your savings will help you cover your family’s needs when you are no longer able to work.

Looking back at the family budget, you can say that even if you and your family spend the amount V completely every month, you would have been able to save an amount that is at least equal to your payments for Insurance and Retirement/Pension. If you are paying for the purchase of education plans and a home, these are additional savings for you.

Compute for the minimum amount that you and your family are actually saving per month by adding all of your payments for Insurance and Retirement. If you are buying education plans or a home, add these also. You will see how much you are already saving automatically without your even knowing it!


14. What do you do with the money left over after you have met your family’s financial needs?

If you think this excess income or surplus is going to continue for some time, then you can increase your retirement/pension plans. This has the effect of “paying yourself more while paying yourself first.” Ask your insurance agent for advice on how to do this.

If you think the surplus is going to be for a short period only, then you can invest it directly in short-term investments.

C. LETTING YOUR MONEY GROW

Instrument Safety Liquidity ReturnSAvINGS AND TIME DEPOSITS

Insured up to PhP 250,000 by the PDIC

Savings accounts very liquid; time deposits not as liquid

Very Low

MONEY MARKET INSTRUMENTS

No guarantee; not insured, but low risk depending on the particulars of the instrument

Short-term: usually around 30 days

Low to Moderate

RETAIL TREASURY BONDS (RTBs)

Guaranteed by the Philippine Government

Minimum holding period may be required; small penalties if withdrawn early

Moderate to High, usually moderate

UNIT INvESTMENT TRUST FUNDS

(UITF) - invested into other

instruments (see Table 3-2)

No guarantee; not insured. Risk depends on the specific investment instruments in the fund

Minimum holding period required; but relatively liquid after that

Return is different for every fund. Historical performance and future prospects are important guides.

MUTUAL FUNDS - invested into

other investment instruments (see

Table 3-2)

No guarantee; not insured. Risk depends on the specific investment instruments in the fund


Return is different for every fund. Historical performance and future prospects are important guides.

STOCKS High risk. No guarantee; not insured. Risk depends on the performance of the company issuing the stocks and factors affecting the stock market.

Traded in the stock exchange. Liquidity depends on the availability of buyers for a specific stock.

Return varies widely. Historical performance and future prospects are important guides.

15. What instruments can you invest in?

As an individual, you can directly put your money into the following:

Source: A Primer on Savings and Investment Instruments in the Philippines, 2006.


Table 3-1 | Savings and Investment Instruments

UITFs and mutual funds, in turn, are invested into:

Instrument Safety Liquidity ReturnMONEY MARKET

INSTRUMENTS

No guarantee; not insured, but low risk depending on the particulars of the instrument

Short-term: usually around 30 days

Moderate

GOvERNMENT SECURITIES

(RTBs, Treasury Bills, Treasury Notes, Dollar-Linked Notes,

etc.)

Guaranteed by the Philippine Government (See Appendix E for a description of different types of Government Securities.)


Moderate to High; but usually Moderate

CORPORATE BONDS/

COMMERCIAL PAPERS

No guarantee; not insured. Risk depends on the specific company issuing the bond/paper

Depends on the terms and conditions of the bond/paper

Moderate to High; but usually higher than Government Securities

STOCKS High risk. No guarantee; not insured. Risk depends on the performance of the company issuing the stocks and factors affecting the stock market.

Traded in the stock exchange. Liquidity depends on the availability of buyers for a specific stock.

Return varies widely. Historical performance and future prospects are important guides.

Source: A Primer on Savings and Investment Instruments in the Philippines, 2006.

16. What should you consider when making an invest-ment?

There are three things to consider when you invest: Safety, Liquidity, and Return. While you will want to maximize all of these three things, this may not be pos-sible at all times. One factor will always counteract another. So you have to strike a balance among the three depending on your objective(s) in investing your money.

39LETTING YOUR MONEY GROW

Table 3-2 | UITFs and Mutual Funds

What To Ask Before Investing

Before making an investment, ask and get answers to the following questions:

• Safety: What are the risks of losing my capital or the money I invested? What is the worst thing that can happen if I put my money in this investment?

• Liquidity: How long will my capital be tied up? Can I withdraw my capital anytime and convert it back to cash? How quickly can I withdraw my money when I need it?

• Return: What is my yield (earnings on what you invest, or your capital) or return on this investment? Is it higher than the inflation rate?

Source: Colayco, Francisco. 2004. Wealth Within Your Reach. Pera Mo, Palaguin Mo!

a) Safety

The first rule of safety is to deal only with licensed agents of top-performing banks and insurance companies. Ask for documents proving that the agent you are dealing with is an authorized representative of the company. You should also ask for proof that the company is a bank licensed by the Bangko Sentral ng Pilipi-nas (BSP) [http://www.bsp.gov.ph/banking/bspsup.asp] or an insurance company licensed by the Philippine Insurance Commission [http://www.insurance.gov.ph/htm/_statistics.asp].

Next, ask yourself this question: “What is the worst thing that can happen if I put my money in this investment?”, or “What is the risk involved?”

The safest investments are Savings and Time Deposits because these are insured up to a certain amount by the Philippine Deposit Insurance Corporation (PDIC).


Right now, you can deposit up to PhP 250,000 in savings and time deposits in any bank and no matter what happens to that bank, the PDIC will pay back your money. However, if your bank closes down, it will take some time before you can recover your deposit. Also, you will not be able to recover any amount above the PhP 250,000 limit if no other bank takes over your bank.

Although savings and time deposits up to PhP 250,000 are guaranteed and are therefore safe investments, they also give you the lowest return on your invest-ment. This is an example of how the different factors affect each other. In this case, increased safety brings about low returns. It is difficult to find a highly safe investment that has very high returns at the same time. That is why when a bank or financial institution offers you very high returns on their savings and time deposits, BEWARE! It is highly likely that there is a great danger or risk that they are not telling you about.

Occasionally the Philippine Government offers Retail Treasury Bonds (RTBs) to the public. RTBs are investment instruments guaranteed by the government that offer returns higher than those from savings and time deposits. However, they are offered only once every 1 or 2 years. You may also have to pay some penalties if you withdraw your investment before the date of maturity (which is 2-5 years or more). Ask your bank if it is accredited to distribute RTBs and find out how you can invest in them.

There are other investments that can give you a higher return but which involve higher risk. These investments will be discussed in the next section. The different types of risk are explained in Appendix D.


b) Liquidity

“How quickly can I withdraw my money when I need it?” This is a question about liquidity.

Again, savings deposits are the most liquid instruments. You can withdraw from them anytime if you have access to Automated Teller Machines (ATMs). Time deposits cannot be withdrawn until their term is finished. These may be 30, 60, 90 days or longer. Again, the disadvantage of these relatively liquid investments is their low return.

Fortunately, there are now investments that can give you greater liquidity and higher returns. Banks, especially the large ones, offer Unit Investment Trust Funds (UITF). Although you cannot withdraw them during the prescribed mini-mum holding period (which can range from 30 to 90 days), you can withdraw from them anytime after that subject to certain conditions.

However, unlike savings and time deposits, UITFs are not insured or guaranteed by any institution. So, theoretically, you can lose most, if not all, of the money you invested. Also, UITFs, even within one bank, have different returns. Some perform well and others, poorly. You have to choose the UITF that fits your requirements and expectations. You need to know and understand what instru-ments the UITF is investing your money in. We will discuss these in a later sec-tion. Again, ask your bank about UITFs and their individual performance.

Mutual funds are invested and managed much like UITFs. However, banks are not allowed to sell mutual funds. You can invest in mutual funds through insur-ance companies and investment houses.

c) Return

An investment is something that should give you a return on your money. In short, investments help your money earn. Interest, dividends, and rent payments are different forms of earnings that give you a return on your investment. Appre-


ciation in the value of the asset you invested in, such as land, buildings, or foreign currency, is another source of return on your investment.

Interest earnings are a common form of return on your investment. Let us say you invested PhP 100,000. If you earn interest of 10% p.a. (“per annum” or per year), then you will receive an interest income of 10% of PhP 100,000 or PhP 10,000 for every year that your investment is active. This income may be paid to you in quarterly, semi-annual, or annual installments. In this kind of investment, the value of your investment (called “principal”, in this case) remains the same at PhP 100,000.

If you invest in UITFs or in mutual funds, you will not receive interest payments. Instead, your PhP 100,000 may grow or lose value across time. If investments are managed well, you may not have to wait for a year for your money to grow to PhP 110,000. However, if the funds are poorly invested, your money may go down in value to, say, PhP 90,000. See Appendix F for a description of different types of mutual funds.

In comparing the returns on different kinds of investments, it is very impor-tant to consider the taxes applicable to both the returns and the investment. For example, if you invest in land or buildings, you have to pay annual real property taxes. If the value of the land appreciates and you sell it, you have to pay several taxes and fees. With a few exceptions, all income from investments handled by banks is subject to taxes and fees. Ask your bank to show you the return on your investment net of taxes and fees.

17. How do you balance safety, liquidity and return?

Begin with your investment objective(s). At this point, we are assuming that you are investing an amount that is over and above what you already planned and budgeted for your and your family’s Insurance, Retirement, Education, Health, Housing and Consumption needs. In other words, the amount you wish to invest is the surplus you generate from your income after you deduct your monthly contribution, Y, and your monthly expenses, V, from your monthly income.


CAsE 1Let us say your investment objective is: “To save and invest money to be able to buy a home in 5 years.”

First, make sure you are a regularly contributing member of PAGIBIG. Your regular contribution is the main foundation of your savings and investment objective.

Safety is the main consideration in attaining your stated objective. You want your savings and investment to be intact so that you can make a down payment or, at most, fully pay for your dream house at the end of 5 years. You won’t mind if the investment is not too liquid because you won’t need it before the 5 years is over. Of course, the return on your investment matters but you are ready to sacrifice some of it for the sake of safety.

Your best options are retail treasury bonds (RTBs), if these are available. If RTBs are not available, UITFs or mutual funds invested mostly in long-term government securities are another option. Your bank should inform you what instruments their UITFs are invested in. There are high-risk UITFs which have a significant amount of investments in stocks. There are more conservative UITFs that are invested mostly in government securities. You should choose the latter.

You should also ask your bank to show you the historical performance of these UITFs. Some banks post graphs of the past performance of their UITFs. You can see from these graphs whether the UITFs are increasing or decreasing in value or whether their values are fluctuating or have remained steady. You would want a UITF that is growing steadily. The graph on the right shows a fund that is growing steadily.


You can also consider investing in a mutual fund. See Appendix F for the different types of mutual funds. To be on the safe side, invest only in the best performing mutual funds. Below is a list of the Top 10 Mutual Funds in the Philippines.

COMPANY ASSETS MARKET SHARE (%)

Ayala Life Fixed Income Fund 19,131.0 43.0Philam Dollar Bond Fund (AIG) 8,720.8 19.6Philam Bond Fund (AIG) 6,851.1 15.4Sun Life of Canada Prosperity Bond Fund 4,413.9 9.9ALFM Dollar Bond Fund 2,139.9 4.8GSIS Mutual Fund 1,002.1 2.2Philippine Index Fund 341.5 0.8Philam Strategic Growth Fund (AIG) 308.5 0.7Mutual Fund Company of the Philippines 307.7 0.7Sun Life of Canada Dollar Advantage Fund 307.0 0.7

Total Market 44,497.0 100.0

Still, you have to know the UITFs’ and mutual funds’ terms and conditions (minimum investment, fees, taxes, holding period, etc.), historical performance, and the instruments it invests in. Only then can you form an idea of the safety, liquidity, and return of such funds.

CASE 2Another possible investment objective is: “To make as much money as possible in the shortest possible time.” Return and liquidity are the main considerations here. You would want to make investments in short-term (30-60 days) instruments that give the highest return. You can look for UITFs that are invested in stocks (you can also invest in individual stocks but you will need a stock broker for this) which have a definite growth prospect in the short term. However, the most important guide would be the UITF’s historical and recent performance.

Source: Economist Intelligence Unit (2004)


Table 3-3 | Top 10 Mutual Funds Ranked by Reported Assets as of 31 December 2003, in million pesos

Is the value of the UITF growing rapidly? Has it not yet reached its peak? Unfortunately, you can never get 100% correct answers to these questions. And that’s where the risk (or lack of safety) lies. Rapid growth can suddenly be reversed by rapid losses in the stock market. Below is the graph of a fund that grows and falls rapidly. Analysts call this fund “risky” and “volatile”.

How much of your investment are you prepared to lose? If you are not prepared to lose any of it, then you might want to rethink and revise your investment objective to: “To make as much money as possible in the shortest possible time from low to moderate risk instruments.”

If you change your objective to this, then look for UITFs with a short holding period (30-60 days) that have been showing significant growth but which are substantially invested in government securities. The latter moderates the risk but also brings down the return. However, in life as in investing, you can’t win them all.

From beginning to end, what you need to be able to balance safety, liquidity, and return is INFORMATION. The bank or financial institution offering you investment products should give you all of the information you ask for about these products. They should also give you information about how their company itself is performing financially. If they are not willing to give you information about the performance of their products and their company, DON’T DEAL WITH THEM.


Table 3-3 | Top 10 Philippine Commercial Banks Ranked by Reported Assets as of the 2nd Quarter of 2006, in million pesos

You should also get independent information from the Bangko Sentral ng Pilipinas (BSP) [http://www.bsp.gov.ph/banking/bspsup.asp] about the performance of banks, and from the Philippine Insurance Commission [http://www.insurance.gov.ph/htm/_statistics.asp] about insurance companies.

COMPANY ASSETS

1. Metropolitan Bank & Trust Co. (MBTC) 593,8992. Bank of the Philippine Islands (BPI) 536,8183. Equitable PCI Bank (EPCI) 323,3894. Land Bank of the Philippines (LBP) 316,2335. Banco de Oro (BDO) 286,7166. Philippine National Bank (PNB) 234,3217. Development Bank of the Philippines (DBP) 228,6218. Citibank N.A. 211,9239. Rizal Commercial Banking Corp. (RCBC) 199,73810. Union Bank of the Philippines (UBP) 171,581

Source: Business World, August 16, 2006

18. When dealing with a bank, how do you protect yourself from losing your investments?

Here are some tips for dealing with banks from the Philippine Deposit Insurance Corporation (PDIC):

• Know the bank’s reputation. Investors and depositors should read newspapers and surf the bank and Bangko Sentral ng Pilipinas websites to find out about the bank’s capitalization, ranking, financial statements, income projection, and products and services.

• Know the bank’s products. Depositors should determine whether a particular bank product is a deposit product. They may confuse deposit products with investment schemes not covered by PDIC.


• Know the current market interest rates. Depositors should be cautious about overwhelmingly high interest rates. Unusually high interest rates compared to market interest rates may mean liquidity problems and higher risks.

• Read the fine print. Depositors should also be careful to read the fine print—tiny words, phrases, or sentences in the passbook, certificate of time deposit, or any document that need to be signed.

• Secure and update bank records. Depositors must secure a passbook, ATM card, certificate of time deposit, checkbook and other bank records. These records serve as proof of the deposit accounts.

• Check for signs that the bank may be in trouble. Depositors should be wary when they cannot withdraw their money on demand or if they can withdraw money only on a schedule given by bank officers. They should also be cautious of aggressive solicitation by bank marketing personnel. Finally, depositors should take note of their bank’s past due loan ratios. High levels of unpaid debt may cause a bank to have difficulty in servicing withdrawals.

19. How about investing your savings in your own business?


First, you must understand that although your own business is a good way to earn an income to live on when you return from work overseas or after years of being just an employee, not everyone has what it takes to run a successful business.

What Successful Entrepreneurs Have • Achievement Cluster Ability to seek and identify opportunities for going into business Persistence Commitment to work Ability to take manageable moderate risks (that is, risks where there is a good chance of recovery and success) Efficiency and commitment to quality standards

• Planning Cluster Goal setting Information seeking Systematic planning and monitoring

• Power Cluster Ability to persuade and network Self-confidence

How many of these qualities do you have?

If you think you have what it takes to become a successful business person, then it’s time to plan your business.

First, think about what business you can engage in. Look around you, identify the business opportunities, and evaluate the business options. Do a situational analysis, in which you identify the strengths, weaknesses, opportunities and threats to your proposed business.

Source: UP Institute for Small Scale Industries. 2002. 13th Start Your own Business Course Module.


Ask yourself:• What type of service or product do I want to offer?• Will my proposed service or product satisfy a need or want?• Do I have a market for your service or product? Are there people willing to pay for my service or product?• Will my intended market continue to patronize my business for years and years to come?• Are there others offering the same service or product? Are they able to meet the demands of the market? Do I have a competitive advantage over these others? • Can I sell my service or product at a profit? • Am I competent in this field of business? • Do I have the necessary resources—capital, supplies, equipment, skill, technology, and labor—for this type of business?

If you answer “No” to any one of these questions, think over your business idea or give it up altogether.

Once you have satisfied yourself that your business idea will work, then it’s time to write out a business plan. A typical business plan includes the following:

A. Introduction and General Background of the project • why the project was chosen; • its objective(s); • the nature of the project’s outputs and its uses

B. Marketing Plan • product range • product specifications



• product mix • projected demand • target market • competition • selling strategy

C. Production Plan: • land and building requirements • location and layout of store/plant facility • process • equipment needed • power requirements • utilities requirement • store/plant capacity • sources of raw materials/goods

D. Organizational Plan • staffing complement – number of staff and required skills • business organization, including duties and responsibilities

E. Implementation Schedule: timetable showing when different phases of the project are to be carried out

F. Financial Plan: • calculation of initial investment required • operating requirements and costs • working capital estimate • projected sales and production program • total project cost • project financing sources • profitability at 100% capacity utilization • breakeven analysis • projected Balance Sheet • Income Statement and Cash Flow


Why You Need a Business Plan ▷ It assures you that all relevant questions have been answered.▷ It enables you to organize and begin your business operations in an orderly way.▷ It gives you more confidence in what you will do.▷ It provides you with the general direction for your business; it gives you a sense of where your business will go tomorrow, in a week’s time, in a month’s time, or in a year’s time.▷ It is a useful basis for making decisions through critical expansion and diversification periods.▷ It shows how much money is needed, what it is needed for, when and for how long it is needed in the business. ▷ It can help reduce the risk of failure due to undercapitalization, early cash flow problems, excessive and unplanned expenditures. ▷ It enables you to set targets and later evaluate your business performance against these targets.▷ It is a requirement for taking out a business loan or for persuading others to invest in the business.



Why Businesses Fail According to Rhodora Hizon of the Center for Small Enterprises (CSE), a

nongovernment organization specializing in providing technical assistance and

training to small enterprises worth over a million pesos, more than 75% of for-

mer OFWs who sought CSE’s advice failed to make their enterprises grow.

What causes a business to fail or to go bankrupt?

Hizon says one reason is lack of skills related to the business. Another reason is

poor choice of business to engage in. According to Colayco (2004, p. 177), “Ex-

cept for a really entrepreneurial minority, most…go into businesses that are easy

to enter…[such as] sari-sari stores, FX taxi business, [and] tricycle business…

[These are} businesses that are very often already crowded. They end up going

after small markets that cannot sustain too many sellers such as hot pandesal,

sago drinks and fish balls.”

Other significant causes of failure in business are:

• Poor management – manifested for example in the lack of accounting

records

• Poor attitude towards business and life in general – for example,

lack of confidence in ability to succeed, inability to compete,

bahala na attitude, impatience/lack of willingness to work hard

and wait before reaping rewards

If you have the right attitude and the skills, lack of capital is a problem that you

can easily solve.

What about having too many dependents or relatives? It depends. If your depen-

dents or relatives can provide loyal, cheap and reliable human power, then they

can contribute to the success of your business. However, if your dependents are

poor workers, unreliable, and unwilling to earn their own keep or pull their own

weight, then they will pull your business down.



A P P E N D I x A

Insurance Products and Pension Plans

What is an insurance product?

An insurance product is a guarantee of certain benefits in the event of anything untoward. If you are insured, your life insurance company pays your beneficiaries (usually your spouse or immediate family members) the amount insured (for example, PhP 2 million) following your death. Non-life insurance covers fire, casualty, and accidents.

To be insured, you must regularly pay your insurance company monthly, quar-terly, or annual “premiums”. Insurance companies invest the premiums they receive from you and other clients in selected financial instruments in ways that are regulated by the government through the Philippine Insurance Commission which is under the Department of Finance. Some commercial banks with univer-sal licenses also offer insurance products. (Ateneo-EPRA Project, 2006)

What are pension funds?

“Pension funds provide retirement income through regular payments to employ-ees covered by a pension plan. Funds are obtained through contributions from employees or employers. You may also want to buy your own pension plan from life insurance companies if you have extra income that you want to save for your retirement.

“The Government Service Insurance System (GSIS) and the Social Security System serve as the largest pension funds in the Philippines. These two govern-ment-administered funds invest in government securities, the stock market, commercial papers, and property development. Their income usually comes from salary and housing loans, interest income in investments, dividends, and foreign exchange gains. (EIU, 2004) Apart from GSIS and SSS, there is another smaller

government administered fund: the Armed Forces of the Philippines Retirement Separation and Benefits System (AFP-RSBS).

“At present, GSIS and SSS are experiencing difficulty in meeting their redistribu-tion goal. Specifically, benefits paid to members have outpaced the amount of contributions of members. Meager returns on investments, poor compliance and enforcement in payment of premiums, low collection rate on loans, huge losses from housing programs, and the lack of regulatory institution are threatening the viability of GSIS and SSS. Nonetheless, there have been initiatives to reform the country’s pension system and enhance its role in capital market development.” (Ateneo-EPRA, Project, 2006)

Two In OneThere are now many insurance products that combine life insurance with pension plans. Study these well and ask yourself the same questions as above to help you choose the right product. The advantage of these combined products is the ease of payment. For one payment, you get two benefits—your life is insured and you continuously build up your retire-ment/pension fund.

APPENDIx A56

A P P E N D I x B

Family Budget Worksheets

EDUCATIONGOAL

• Put the names of the children/siblings who plan to finish college in Column A.• How much does each year of education/training cost (tuition, books, uniforms, allowances, etc.)? Put in Column D.• Add the entries in D to get the Total Cost of Education, D1.• How much will the other family members contribute to your children’s/siblings’ education? Put these in Column E. Add to get the total E1.• How much will you contribute to your children’s/siblings’ education? Calculate this and put your answer in column F. Add to get the totals D1, E1 and F1.• Divide D1, E1 and F1 by 12 to get the monthly costs, D2, E2 and F2.

A. Name D. Cost of Educa-tion: Tuition, Books, Clothing and Allow-ance

E. Family Contribution

F. Your Contribution

1. 2. 3.4.You

Total Cost of Education

D1 = E1 = F1 =

Monthly Costs D2 = D1/12 = E2 = E1/12 = F2 = F1/12 =

Worksheet 1: Education Goal

HOUSING GOAL

• If your family plans to buy a house and lot, put the amounts for down payment and monthly installments (total for 1 year) in column G.• If the family is renting a house, put the 1-year total also in column G.• How much will the other family members contribute to the down payment and to the installments? Put the answers in Column H. • How much will you contribute? Put the answers in Column I. Add to get the totals G1, H1, and I1. Divide these by 12 to get the monthly costs, G2, H2, and I2.G. Annual Payments for House and Lot

H. Family Contribution

I. Your Contribution

Down PaymentMonthly Installments for 1 yearRent Per Year

Total G1 = H1 = I1 = Monthly G2 = G1/12 = H2 = H1/12 = I2 = I1/12 =

Worksheet 2: Housing Goal

HEALTH PROTECTION

GOAL

• Have the children received the required vaccination (against DPT, polio, measles, BCG, and hepatitis B)? If not, go to the nearest government health center or consult a pediatrician in a private hospital. Put the cost of vaccinations, if any, in Column J.• Do the adults in the family (including you) get a regular medical check-up? If not, they should get it.• Do the adults (including you) have a health care plan? If not, they should get one. A health plan usually pays for a regular medical check- up. Put the annual cost of health plans in the space allotted in Column J.• How much will the other family members contribute? Put their contribution to vaccinations and health plans under column K.• How much will you contribute? Put the amounts for vaccinations and health plans under column L. Add to get the totals J1, K1, and L1. Divide these by 12 to get the monthly costs, J2, K2, and I2.J. Payments/ Year K. Family

ContributionL. Your Contribution

VaccinationHealth Plans

Total J1 = K1 = L1 = Monthly J2 = J1/12 = K2 = K1/12 = L2 = L1/12 =

Worksheet 3: Health Protection Goal

APPENDIx B58

INSURANCE PROTECTION

GOAL

• Do you (and your spouse, if you are married) have life/ accident/disability insurance? A memorial plan? Put the annual cost of insurance and memorial plans in the space allotted in Column M.• How much will your spouse contribute? Put this in Column N.• How much will you contribute? Put this in Column O. Add to get the totals M1, N1, and O1. Divide these by 12 to get the monthly costs, M2, N2, and O2.M. Payments/ Year N. Spouse

ContributionO. Your Contribution

Life/Accident/Dis-ability InsuranceMemorial Plan

Total M1 = N1 = O1 = Monthly M2 = M1/12 = N2 = N1/12 = O2 = O1/12 =

Worksheet 4: Insurance Protection Goal

RETIREMENT GOAL

• Do you (and your spouse, if you are married) have a retirement/pension fund or plan? Put the annual cost of payments for your and your spouse’s retirement/pension funds in the space allotted in Column P.• How much will your spouse contribute? Put this in Column Q.• How much will you contribute? Put this in Column R. Add to get the totals P1, Q1, and R1. Divide these by 12 to get the monthly costs, P2, Q2, and R2.P. Payments/ Year Q. Spouse Contri-

butionR. Your Contribu-tion

PensionTotal P1 = Q1 = R1 =

Monthly P2 = P1/12 = Q2 = Q1/12 = R2 = R1/12 =

Worksheet 5: Retirement Goal

59APPENDIx B

CONSUMPTION Family’s Monthly Ex-

penses

Family Contribution

Your Contribution

Your Monthly Expenses

FoodUtilitiesTransportationClothingLeisure

Worksheet 6: Total Consumption

• To get the monthly figure for Clothing Expenses, calculate expenses for each family member per year, get the total for all family members, and then divide the total by 12. • Include cell phone loads in the cost of Utilities.

Goal Amount Family Contribution

Your Contribution

Education D2 E2 F2Housing G2 H2 I2Health J2 K2 L2Insurance M2 N2 (spouse) O2Retirement P2 Q2 (spouse/parents) R2Consumption S2 T2 U2

Total W = X = Y =

Worksheet 7: The Family Budget

APPENDIx B60

A P P E N D I x C

Pre-Need Plans

The Rules on Pre-Need of the Securities and Exchange Commission (SEC) defines pre-need plans as contracts that provide for the performance of a future service(s) or payment of an agreed upon amount of money at some time in the future, in exchange for the payment of the plan holder of a specified amount. It includes life, pension, education, internment (burial/memorial plans), and other plans that may be approved by the SEC.

Pre-need plans can be open-ended or fixed value. Open-ended, actual cost, or traditional plans pay the actual cost of the need that you paid for, such as education or burial expenses. A number of pre-need companies have been unable to pay open-ended plan holders because the actual costs (for example of education) have increased unexpectedly and substantially in the last 10 years. Now, only fixed-value education plans are being offered by the pre-need companies. (Padojinog, 2005)

In the Philippines, pre-need pension plans usually have the following features (Aquino, 2002): • It usually takes five years of regular monthly, quarterly, or annual installments to complete payment of a pre-need plan.

• You can choose whether you get the benefits of your pension when you reach a certain age (for example, 60 years old) or a number of years (for example, 20 to 30 years) after you complete your payments. When you get your benefits is called the maturity date.

• You can choose whether you get the benefits of your pension in lump sum or in installments or both.

• In case of your death before the maturity date, pay-out will still be made at maturity date to your chosen beneficiaries.

Pre-need companies are required to contribute to a Trust Fund that is funded from their collection of their clients’ payments. Several pre-need companies are subsidiaries of banks or insurance companies. Pre-need firms are regulated by the SEC and are not subject to liquidity requirements imposed by the Central Bank. However, some of the big pre-need companies have experienced financial difficulties and have failed to fulfill their contractual obligations to their clients. (Adapted from Ateneo-EPRA Project, 2006)

APPENDIx C62

A P P E N D I x D

Types of Risk

(The information below is adapted from the Primer on Savings and Investment Instruments in the

Philippines, 2006, Ateneo-EPRA Project.)

a) Interest Rate Risk. Changing interest rates can have a major effect on fixed- income investments, such as treasury bills. If you invest in treasury bills at a fixed rate of 7% per annum (per year) and the interest rates in the market later increases to 10% per annum, then you lose the opportunity to earn the 3% difference. You don’t actually lose money. What happens is that you could have earned more money but didn’t.

b) Business/Event Risk. This refers to unforeseen circumstances that may adversely affect a specific company or industry. If you invest in commercial papers of a specific company and the business of that company faces big problems or are affected by a natural disaster, the value of your investment may be affected.

c) Credit Risk (or Default Risk). This is the possibility that the issuer of a bond (for example, a company or a government institution) will fail to make timely payments of interest and principal to investors in the bond. If the bond is part of a mutual fund or a UITF, the risk will certainly affect the net asset value of that fund. For stocks, credit risk is the likelihood that the company issuing the stock may have financial problems that may cause it to cut or suspend its dividend payments.

d) Market Risk. This arises from the ups and downs and sentiments of the markets, which may affect the prices or value of bonds and stocks.

e) Purchasing Power/Inflation Risk. This happens when the financial return on an investment loses purchasing power due to a general rise in the prices of goods and services. To deal with this risk, a person must ensure that the investment rate of return exceeds the rate of inflation.

f) Political Risk. Political risk stems from changes to the political and socio- economic conditions of the Philippines that may affect market sentiments, business profits, and investment returns.

APPENDIx D64

A P P E N D I x E

Government Securities

What are government securities?

From time to time the Philippine National Government or its agencies, such as the Department of Finance (DoF), issue debt securities to finance deficits and development projects. These debt securities, commonly referred to as Government Securities or GS, can be alternative forms of investments. Because they are either directly or indirectly backed by the Philippine Government, they carry lower interest rates compared to those issued by private companies. (Ateneo-EPRA Project, 2006)

1) Treasury Bills

Treasury Bills (T-bills) are direct and unconditional obligations of the national government. They are issued by the Bureau of Treasury (BTr) of the DoF, to mature after one year or less. They can also be traded in the secondary market before maturity. As an investor you can choose between T-bills that mature in 91, 182 or 364 days. Banks, which comprise majority of the Government Security Eligible Dealers (GSED), bid for T-bills in the weekly auctions held by the BTr. The banks then resell the T-bills to investors.

Strictly speaking, T-bills do not bear interest. They are issued and sold at a discount from their face value and are redeemed at maturity for their full face value. For example, if you buy a 364-day T-bill with a face value of PhP 100,000 at a discount of 12%, you only pay PhP 88,000 for it. After 364 days, you get repaid PhP 100,000, giving you a gain of PhP 12,000. (Ateneo-EPRA Project, 2006)

2) Treasury Notes

Fixed Rate Treasury Notes (FXTNs) are direct and unconditional obligations of the national government issued by the Bureau of Treasury (BTr). They are interest-bearing, carry a term of more than one year, and can be traded in the secondary market before maturity.

FXTNs are considered one of the prime investment instruments in the market. They are safe, liquid, and offer attractive returns to investors. They may mature in 2, 5, 7 and 10, years. The interest rate is fixed for the life of the FXTN based on the results of its auction. Interest can be payable semi-annually or twice a year. FXTNs are issued and sold at a price that is equal to their face value. They are redeemed at maturity for the full face value plus interest of the last period. For example, if you buy a two-year FXTN with a face value of PhP 1,000,000 at an interest rate of 12% payable semi-annually, you will pay the face value of PhP 1,000,000. Thereafter, you will receive interest payments of PhP 60,000 twice a year. At the end of two years, you will receive PhP 1,000,000 and the last interest payment of PhP 60,000. (Ateneo-EPRA Prohect, 2006)

3) Retail Treasury Bonds

Retail Treasury Bonds (RTBs) are like treasury notes but usually have longer maturity (5 years and above) periods. They are direct and unconditional obligations of the national government that primarily caters to the retail market or the end-users. Issued by the Bureau of Treasury (BTr), they are interest-earning, carry a term of more than one year, and can be traded in the secondary market before maturity. RTBs are safe, liquid, and offer attractive returns to investors. The interest coupons of treasury bonds are paid to the investor each quarter.

RTBs are a critical component in the government’s program to make government securities available to small investors. They are issued to mobilize savings and encourage retail investors to purchase long-term papers. The minimum placement of RTBs is PhP 5,000. The payments and returns are similar as those

APPENDIx E66

for FXTNs except that the face value is much smaller and the interest payments are made four times a year (or quarterly). (Ateneo-EPRA Project, 2006)

4) Dollar Linked Peso Notes (DLPN)

Dollar Linked Peso Notes (DLPNs) are direct and unconditional obligations of the national government and are issued by the Bureau of Treasury (BTr). They bear interest, carry a term of more two or three years, and can be traded in the secondary market before maturity. The notes track the movement of the Philippine Peso and US Dollar exchange rate. Payments of interest and principal are linked to the movement of the exchange rate and computed based on the foreign exchange factor. So if the dollar goes up compared to the peso, then the return on these instruments goes up. If the dollar goes down compared to the peso, then the return will go down. (Ateneo-EPRA Project, 2006)

How can I purchase government securities?

The institutions that buy government securities include mutual funds, pension funds, insurance companies, commercial banks, corporations, state and local governments, central bank, and international investors.

You can buy or hold government bonds through UITFs, mutual funds, or pension plans. Those who opt to purchase government securities through these channels tend to look for a dependable income, relative safety, and diversification (BusinessWorld, 2005). Retail investors may also purchase government securities (GS) such as RTBs through eligible/qualified dealers or commercial banks.

Although government bonds are the safest of investment instruments and are relatively “risk-free”, they are not immune to credit or default risk, credit spread risk, or downgrade risk. Credit or default risk is the possibility that the issuer will fail to meet the terms of the obligations with respect to the timely payment of interest and principal. Credit spread risks refer to the probability of an increase in the spread of the bond over a default-free security (that is, US Treasury security)

67APPENDIx E

and a decline in the price of that bond. Downgrade risks refer to the possibility that a credit rating firm (such as Fitchratings, Moody’s, or Standard and Poor’s) will lower the rating of a bond. Downgrade risks are closely associated with credit spreads risks. (Ateneo-EPRA Project, 2006)

APPENDIx E68

A P P E N D I x F

Types of Mutual Funds

(The information below is adapted from Primer on Savings and Investment Instruments in the

Philippines, 2006, Ateneo-EPRA Project.)

Depending on the investment objectives, professional managers buy, hold and sell assets in equities, fixed-interest instruments like bonds, and money-market deposits. In the Philippines, mutual funds fall under the following:

a) Money market fund. This invests in short-term fixed income instruments (that is, those securities with less than one year of maturity). This portfolio has the lowest risk.

b) Bond fund. This describes a type of investment company that primarily invests in long-term bonds and other types of debt securities. Earnings do not fluctuate as much as those of the other types of funds.

c) Balanced fund. This makes investment in a balanced portfolio of stocks and fixed income securities. It has both the earning power of stocks and the stability and income of bonds.

d) Index fund. This fund consists of several stocks in the same proportion as that of the index that the fund tracks (for example, PSE Composite index), and has less risk than the equity fund.

e) Equity fund. This fund is mostly placed in the stock market and has wide fluctuations. Nonetheless, in the long run (for example, 5-10 years) equity funds tend to perform better than fixed income funds.

In the Philippines, banks are not allowed to sell mutual funds because it gives “the impression that the investor is dealing with the parent bank” (USAID-AGILE, 1999). Mutual funds are distributed and sold by insurance companies and asset management companies and regulated by the SEC under the Investment Company Act. In February 2001, the SEC allowed Philippine-registered mutual funds to invest 20% of their portfolio in foreign funds or securities in response to weakness in the local equities market. (EIU, 2004)

Since mutual funds are professionally managed, investors need to pay specific fees called sales fee/load. Like UITFs, the actual price of each share is calculated in terms of the Net Asset Value Per Share (NAVPS), which is the value of all assets held by the fund (less any liabilities) divided by the number of shares sold. To realize earnings on a mutual fund, an investor should compare the current NAVPS of the fund with its NAVPS at the time he/she bought it, and also take account of cost of sales and redemption fees. The NAVPS of mutual funds is regularly published in BusinessWorld, Philippine Daily Inquirer, and Philippine Star.

APPENDIx F70

R E F E R E N C E S

Print MaterialsAñonuevo, Augustus T. 2002. Reintegration, An Elusive Dream. In Dizon-Añonuevo, Estrella and Añonuevo, Augustus T. (eds.) Coming Home: Women, Migration & Reintegration. Balikabayani Foundation Inc. and ATIKHA Overseas Workers and Communities Initiative, Inc.

Aquino, Emilio. 2002. Private Pension Schemes in the Philippines: Regulatory Practices. OECD, Korean Financial Supervisory Service, Korean Ministry of Labor, and International Network of Pension Regulators and Supervisors (INPRS) Conference on Private Pensions. October.

Ateneo de Manila-EPRA-USAID Project. 2006. A Primer on Savings and Investment Instruments in the Philippines.

Bagatsing, Valentino. 2005. Government Securities. Introduction to Financial Markets and Development by Ateneo-EPRA USAID Project. 31 August.

Bernardo, Romeo. 2005. Introduction to Pension Systems. Introduction to Financial Markets and Development by Ateneo-EPRA USAID Project. 31 August.

Bautista, Ernesto. 2005. Philippine Financial Institutions and Instruments. Introduction to Financial Markets and Development by Ateneo-EPRA USAID Project. 30 August.

BusinessWorld Research. 2006. BusinessWorld 2nd Quarter Banking Report. August 16.

BusinessWorld. 2005. Unit Investment Trust Fund: Investors trust anew. 1 August.

BusinessWorld. 2005. Guide to Bonds and other Fixed-income Instruments. 30 May.

Colayco, Francisco. 2004. Wealth Within Your Reach. Pera Mo, Palaguin Mo! Colayco Foundation for Education, Inc.

Dizon-Añonuevo, Mai. 2002. Migrant Returnees, Return Migration and Reintegration. In Dizon-Añonuevo, Estrella and Añonuevo, Augustus T. (eds.) Coming Home: Women, Migration & Reintegration. Balikabayani Foundation Inc. and ATIKHA Overseas Workers and Communities Initiative, Inc.

Economist Intelligence Unit. Country Finance 2004. Philippines.

Mendelson, Lewis. 1999. A Strategic Vision: Strengthening Mutual Funds and Improving the Public’s Perception of Them. USAID-AGILE.

Mishkin, Frederic. 2001. Economics of Money, Banking, and Financial Markets. Adison Wesley Longman.

Padojinog, Winston. 2005. Pre-Need Industry: Profile, Performance, and Issues. Introduction to Financial Markets and Development by Ateneo-EPRA USAID Project. 31 August.

Philippine Daily Inquirer. 2005. Looking for Seminars on Mutual Funds. 24 January.

Philippine Daily Inquirer. 2003. Sins Committed in the Name of Diversification. 4 November.

UP Institute for Small Scale Industries. 2002. 13th Start Your own Business Course Module.

Valerio, Rosanna Luz F. 2002. Pag-ahon sa Kumunoy ng Utang: The Debt-ridden Life of Migrant Women. In Dizon-Añonuevo, Estrella and Añonuevo, Augustus T. (eds.) Coming Home: Women, Migration & Reintegration. Balikabayani Foundation Inc. and ATIKHA Overseas Workers and Communities Initiative, Inc.

Web Resources Asiaweek. 2001. Asiaweek Agenda Personal Finance. Risk and Reward. Available online at http://www.asiaweek.com/asiaweek/97/1017/aa1.html.

Bureau of Internal Revenue Website. 2004. Available at http://www.bir.gov.ph.

Eastern Michigan University. 1998. Basics of Savings and Investing (A Teaching Guide). Available online at http://apps.nasd.com/investor_Information/tools/teachers/basics_ savings.asp.

Money Market Association of the Philippines Website. 2003. Available at http://www.mart.com.ph.

Opiniano, Jeremiah. 2006. Ex-OFWs, advocates confront business realities. OFW Journalism Consortium. Stories for the Faraway Filipino, Volume 5, Numbers 4 & 5 - Part 1. Available online at http://www.ofwjournalism.net/previousweb/vol5no4&5/ prevstories5041.php www.ofwjournalism.net.

Philippine Deposit Insurance Corporation Homepage. 2000. Available at http://www.pdic.gov.ph.

REFERENCES72

Documents

4936309 Pagpapahalaga Sa Perang Kinita Pinoys Guide to Managing Finances